Retention of Title Clauses – How Effective Are They?

When you sell goods, you want to ensure you get paid. But what happens when the buyer is unable to do so?

That’s where a Retention of Title clause comes in. Putting a Retention of Title clause in a contract means the supplier retains ownership of the goods sold until full payment is made. This could allow suppliers to repossess products if the buyer is unable to pay for them.

However, there are limitations that suppliers need to take into consideration when deciding if they want to rely on a Retention of Title clause. In this article, we’ll take a look at what a Retention of Title clause is, as well as how easily it can be enforced.

Retention of Title Clause: What Is It and What Is It For?

A Retention of Title clause is put into a contract to reduce risk to the seller in instances where the buyer does not pay for the goods up front. Assuming the clause is valid, it will give the seller ownership of the assets even once they have passed into the hands of the buyer.

Should the buyer be unable to pay, a well-written clause should allow the seller to retain the goods and minimise losses from the failed sale.

Different Types of Retention of Title Clause

There are broadly four types of Retention of Title clause, and issues with enforcement can arise depending on which one you use. Let’s take a look at them:

Simple Goods Clause: A simple goods clause states ownership of goods sold under the relevant contract will stay with the seller until the buyer has paid in full.

All Monies Clause: An all monies clause gives the seller ownership of all goods supplied to the buyer, under all contracts with the supplier, until the buyer has paid for all the goods in full.

Proceeds of Sale Clause: A proceeds of sale clause allows the customer to sell the goods but retains a right to the proceeds.

Mixed Goods Clause: A mixed goods clause permits the customer to combine the goods with other goods in a manufacturing process, but the seller can retain rights to the manufactured product – more of this later in the article.

In many situations, an all monies clause is likely to be easier to enforce. If a supplier has made multiple sales of the same product to a single buyer using a simple goods Retention of Title, they would have to be able to identify the goods sold under each contract to retain them. Doing so could prove impossible in many situations, rendering the clause ineffective.

Retention of Title Clause: What Are the Limitations?

The Contract Itself

One of the most significant limitations is how the supplier presents their Retention of Title clause. Suppliers can’t assume that adding a Retention of Title clause to the Terms and Conditions of a deal will be enough. Instead, they should set the clause out explicitly in the terms of sale and seek formal acceptance from the buyer.

P4 (the supplier) had included a Retention of Title clause in its terms and conditions. However, a judge ruled that as the terms were on the reverse of the document and no mention was made of the clause during correspondence between the two companies it was not legally binding.

Mixed Goods

If the buyer uses the goods during the manufacturing process, they are likely to be difficult to retain. A supplier can’t get back cement used to build a house or leather used to make shoes, for example.

It is possible for a supplier to offset risk using a mixed goods clause which can give them rights to the final product. However, this can be complicated if multiple suppliers have a similar contract.

Issues also arise when a buyer buys identical unbranded goods from different suppliers. A seller of screws could find it impossible to retain its product from cartons of identical screws from multiple suppliers.

Sellers can give themselves some protection by requiring buyers to keep the goods stored separately from those made by other companies until full payment has been made.

Perishable Goods: Fruit, Flowers, Etc.

A Retention of Title clause can be ineffective if the goods are perishable. Even if the supplier can get the goods back, the value of perished goods is likely to be zero.

How Easy Is It to Enforce a Retention of Title Clause: Administration vs Insolvency

There are differences in how a supplier can enforce Retention of Title depending on whether a struggling buyer enters insolvency or administration.

Insolvency: When a buyer enters insolvency, an effective Retention of Title clause can help the supplier regain possession of its goods before other creditors. However, even with a legally binding Retention of Title, the supplier is unlikely to be able to recover their goods instantly. This delay could damage the company if it were relying on funds earned from selling the assets.

Administration: Buyers that go into administration with outstanding payments are protected from the repossession of goods by suppliers. In order to gain access to the assets, suppliers are required to get a court order or permission from the administrators. Again, this delay could damage the supplier.

In both insolvency and administration, the supplier must immediately make the relevant parties aware of Retention of Title. This is highlighted in the 2011 case of Sandhu (t/a Isher Fashions UK) v Jet Star Retail Limited & Ors. Suppliers using Retention of Title clauses should not assume they have the rights to the goods when a company goes into administration.

In the above case, while in administration the administrators sold the clothes — as part of the company — to a third party: Internacionale Retail LTD.

Isher Fashions disputed that Jet Star and the administrators had the right to do this. However, the judge ruled that as Isher Fashions had not requested retention of the goods before the company was sold, the defendants had the right to sell them.

There Are Other Ways to Mitigate Risk

It’s hard to enforce Retention of Title clauses – particularly in the event of an administration. At this stage the Official Receiver will need solid evidence and recovery starts to become complicated. Furthermore, Retention of Title case law is evolving and new cases can impact how well protected you are.

Although Retention of Title can be effective, at Red Flag Alert we advocate a data-driven approach to risk management. By accessing up-to-date information on businesses you supply, it’s easy to spot signs of financial distress.

Red Flag Alert gives every UK business a specific health rating so you can be notified early if any of your customers are experiencing financial distress and take pre-emptive action.

This is far more effective than trying to recover a bad situation once administration proceedings are underway.

To learn more about how Red Flag Alert can help mitigate risk in your business, please get in touch with Richard West on richard.west@redflagalert.com or 0344 412 6699.

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